Interest rate pressures and how they affect SME housebuilders

There is no getting away from the fact that this will ultimately lead to reduced lending within the development finance sector and the lending that is available, will become more expensive and require more upfront equity.  

SMEs now have more access to funding than they have ever had with the emergence of Challenger Banks, Peer to Peer and smaller boutique development lenders entering the market over the last 15 years.  It is imperative, now more than ever, that these lenders continue to support these SME housebuilders without restricting LTV ratios or increasing rates too drastically as this would significantly reduce output via the increased equity required.

There is also no escaping the fact that the cost of funds for lenders from their institutional or retail investors is likely to increase over the coming months as interest rates rise, and these will inevitably have to be passed on in some form to their borrowers.  This could create for the first time in several years a downward pressure on land values as GDVs start to stagnate and housebuilders look to maintain their margins.  The increased build costs that have been felt over the last 12 months due to the increase in materials will also surely start to show some negative impact on land values.

Unfortunately, this challenging context will disproportionately affect smaller housebuilders, who need to build and make profit to stay in business with limited levels of equity.

Whilst lenders will always look to mitigate risk whether that be counterparty, construction, or sales risk it is imperative that lenders continue to support both their existing and new SME housebuilders with similar leverage and price at similar levels than they have in recent years.  Equity is limited for these SME housebuilders meaning decreased LTV’s and increased borrowing costs limits their ability to do multiple or larger schemes.

It is well publicised that larger housebuilders can’t fix the structural undersupply of housing in this country alone and need the support of SMEs to meet with demand.

LDS Sales Guarantees support SME housebuilders by guaranteeing to purchase any completed and unsold homes on a site at a pre-agreed, fixed price (of 80% Gross Development Value based upon lenders Red Book valuation). This removes sales risk for both the developer and the lender in all market conditions.

An added benefit to housebuilders is a 10% deposit, released unsecured and interest free, on exchange, into project cashflow. When combined with the development finance loan, this provides the housebuilder with the option to reduce their upfront equity contribution or redirect resource to be spread up to 3 times further across more new developments.

You can get an instant Sales Guarantee proposal, free of charge and obligation here at LDSyoursite.com